Economy Transdisciplinarity Cognition Volume 17, 90-97

www.ugb.ro/etc Issue 1/2014

Simplified Direct Costing Method Applied in Hotel Industry

Anita MIHALACHE, Paula PANTAZI

George Baritiu University, Brasov, ROMANIA
anita.mihalache@gmail.com
pantazi_paula@yahoo.com

Abstract: This article is a part of the PhD thesis entitled Improvement of management
accounting in tourism and public food industry. The research we have done aims mainly at
identifying the organizational problems related to management accounting and cost
calculation within the economic unities operating in tourism and public food, as well as
exploring ways of improving it. Research has been considered appropriate due to the
increasing importance of tourism in Romanian economy and also due to the lack of decision
tools related to costs and future profitability forecast which the management of the hotels
experienced.
In the thesis the improved versions of the direct-costing method in the tourism and public food
industry was implemented: the simplified direct-costing version, the evolved direct-costing
version and the covering calculation of the fixed expenses.
This paper will present the first improved version the simplified direct-costing.
In order to apply this version of the direct-costing method we first needed to identify the cost
bearer, the methods currently applied in hotel business, the revenue and costs for each cost
bearer and to separate variable and fixed costs.
In this case study (a hotel from Poiana Braov, Romania) the hotel was divided into three cost
centres: accommodation, restaurant and other services, each cost centre having
different cost bearers. For the accommodation department the cost bearer is the overnight
stay, for the restaurant department the cost bearer is the place occupied in the restaurant, and
for the other services department the cost bearer is one service per client.
Keywords: direct-costing, calculation method, expenses analysis, contribution margin

Introduction
Expenses analysis is very important in any enterprise activity, because in this field a series of economic
phenomenon, in connection to consumption and inputs usage, occurs. Product competitiveness and
activity efficiency depends on the way inputs are consumed and used. Reduction of production costs is, in
the extent possible, a priority objective of every enterprise. Therefore a detailed analysis of the main
categories of expenses that contributes to formation of cost is necessary [1].

For this purpose expenses are classified according to their relation to the production variations into
two categories: variable expenses (that depends on the production variations) and fixed expenses (that
are independent to the production variations).

Fixed expenses, according to the simplified direct-costing method, are treated like a unitary mass that
affects the period costs and are not allocated on the cost bearers. Therefore, fixed expenses are not
considered when the product cost of goods, works or services is calculated, but they are transferred
directly upon the income statement of the period referred to. In the simplified direct-costing method
only variable costs are taken in account and subjected to distribution upon the cost bearers.

In order to calculate the variable costs accordingly to the simplified direct-costing method, the
following steps must be complied:
a) In the first step the effective expenses of a certain period must be structured accordingly to their
relation with the production volume, and then divided on the economic function (production,
sales, administration). Expenses incurred in the reporting period consist of:
- variable expenses (production and sales);
- fixed expenses (production, sales and administration).

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 b) In the second step the cost of the cost bearers (goods, works or services) are calculated taking in
account only those expenses that vary accordingly to the production volume. This step is divided
into two phases:
- first, the direct variable costs are collected on the costs centres;
- second, the variable costs identified on the costs centres are attributed to the cost bearers.

1. Preparing the Information

In the hotel industry expenses are collected on the costs centres based on the supporting
documentation of the different activities undertaken. On each supporting document registered by the
primary accounting, the character of the expenses must be stated (variable or fixed), according to
classification scheme of the production, sales and administration expenses. Thereby, the variable
expenses recorded in the primary documents are easily tracked on the cost centres, and then they are
centralized and transmitted to the central accounting department. In other words, each cost centre
officer is interested only in the variable expenses (because they are cost elements), the fixed expenses
registered in different documents are transmitted directly to the central accounting department. Next,
in the table no. 1, the statement of variable expenses identified on the cost centres is presented.

Table no. 1. Statement of variable expenses

Expenses level
No. Explanations According Deviation
Effective
to budget
1. Direct raw materials and consumables, in which: 52,973 51,856 -1,117
1.1. Direct consumables 28,426 27,315 -1,111
1.2. Cleaning products 21,848 21,946 98
1.3. Other operating supplies 2,699 2,595 -104
2. Direct productive personnel salaries and related 16,540 18,756 2,216
contributions
3. TESA salaries and related contributions (the 13,241 14,871 1,630
variable part)
4. Other variable expenses 58,972 60,398 1,426
4.1. Agency commissions 6,921 7,043 122
4.2. Customers facilities 45,839 46,418 579
4.3. Customers relocation 6,212 6,937 725
5. Maintenance and functioning of the equipment 331,059 332,273 1,214
5.1. Maintenance of the accommodation spaces 57,884 59,962 2,078
5.2. Expenses of premises and facilities maintenance 15,446 15,972 526
5.3. Expenditure on repairs in common areas 9,692 10,428 736
5.4. Water and energy expenses 173,653 171,775 -1,878
5.5. Laundry of sheets 54,199 54,255 56
5.6. Laundry of uniforms 4,422 4,435 13
5.7. Maintenance and operation of transport means 15,763 15,446 -317
6. Overheads of department 235,392 239,269 3,877
6.1. Water and electrical energy consumed in 24,147 26,719 2,572
household purpose
6.2. Flowers and decorations 5,733 5,665 -68
6.3. Printing and stationery 17,418 17,881 463
6.4. Entertainment and Leisure 22,171 21,682 -489
6.5. Taxes and fees 160,097 161,505 1,408
6.6. Phone and fax 5,826 5,817 -9
Total variable expenses of the
I. 708,177 717,423 9,246
accommodation cost centre
1. Direct raw materials and consumables, in which: 547,466 549,382 1,916
1.1. Raw materials 349,750 351,359 1,609
1.2. Merchandise 149,894 150,583 689
1.3. Fuel for kitchen 24,124 23,892 -232
1.4. Direct consumables 15,459 15,216 -243
1.5. Cleaning products 8,239 8,332 93

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 Direct productive personnel salaries and related
2. 8,400 9,232 832
contributions
TESA salaries and related contributions (the
3. 4,572 5,195 623
variable part)
4. Other variable expenses 836 916 80
5. Maintenance and functioning of the equipment 147,173 147,522 349
5.1. Maintenance of the kitchen equipment 30,296 32,188 1,892
5.2. Expenses of premises and facilities maintenance 9,862 9,820 -42
5.3. Water and energy expenses 90,888 89,224 -1,664
5.4. Laundry of sheets 6,627 6,340 -287
5.5. Laundry of uniforms 8,808 9,196 388
5.6. Expenses regarding cracking of kitchen ware 692 754 62
6. Overheads of department 66,164 66,556 392
Water and electrical energy consumed in
6.1. 18,334 18,922 588
household purpose
6.2. Decorations 1,999 2,113 114
6.3. Printing and stationery 9,005 8,756 -249
6.4. Entertainment and music 35,070 34,774 -296
6.5. Banquets expenses 1,177 1,308 131
6.6. Phone and fax 579 683 104
Total variable expenses of the restaurant
II. 774,611 778,803 4,192
cost centre
1. Direct raw materials and consumables, in which: 83,716 82,118 -1,598
1.1. Cost of sales 80,155 80,926 771
1.2. Detergents and other cleaning products 3,561 1,192 -2,369
Direct productive personnel salaries and related
2. 2,152 2,368 216
contributions
TESA salaries and related contributions (the
3. 2,106 2,346 240
variable part)
4. Other variable expenses 626 647 21
5. Maintenance and functioning of the equipment 48,828 50,635 1,807
5.1. Expenditure on machinery repairs 7,282 7,730 448
5.2. Expenses of premises and facilities maintenance 1,183 1,426 243
5.3. Water and energy expenses 21,847 22,557 710
5.4. Laundry of sheets 16,579 16,742 163
5.5. Laundry of uniforms 1,937 2,180 243
6. Overheads of department 6,165 6,025 -140
6.1. Printing and stationery 1,107 1,124 17
Water and electrical energy consumed in
6.2. 4,833 4,661 -172
household purpose
6.3. Phone and fax 225 240 15
Total variable expenses of the other services
III. 143,593 144,139 546
cost centre
1. Sales personnel salaries and related contributions 27,026 29,962 2,936
2. Expenses for transportation 108,716 109,662 946
Maintenance and functioning of the means of
3. 15,527 16,948 1,421
transportation
4. Consumables 6,580 6,636 56
5. Other sales related expenses 1,484 1,428 - 56
IV . Total variable expenses of sales department 159,333 164,636 5,303
V. Total variable expenses 1,785,714 1,805,001 19,287

The statements regarding the variable expenses identified by their nature are transferred to the general
accounting compartment that centralizes all these expenses on the economic entity. The centralized
statements regarding the variable and fixed expenses are the basis of the simplified direct costing
calculation.

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The informational cycle, on which the centralized statements of the variable and fixed expenses are
based, is presented in figure no. 1.

Simplified direct costing calculation retrieves the effective variable cost value from the statements of
variable expenses presented for each cost center. Although the usage of standards is possible, the
simplified direct costing calculation dose not appeal to them because its purpose is not the forecast
of expenses and results, this being proper to the evolved direct costing method. If the hotel
management consider the information revealed by the simplified direct costing calculation to be
sufficient, standards and budgets can be used because they are very useful tools for an efficient
management.

Budgets of Supportive
centers documents

Centralized statement of variable

expenses on the cost centers

Central accounting department

Centralized situations of variable Centralized situations of fixed

expenses on the hotel expenses on the hotel

DIRECT COSTING CALCULATION

Figure no. 1 Direct costing calculation informational cycle (Mihalache)

2. Applying the Simplified Direct Costing Method

In order to apply the simplified direct costing method, as for any other direct costing method,
information regarding the activity volume is necessary. This statistical information is identified for
every operational cost centre. The sales centre is responsible for research regarding the number of
rooms occupied in the calculation period, real average rate, number of places occupied in the
restaurant, restaurants turnover, the number of clients that asked for other services (besides
accommodation and restaurant) and the turnover of the other services cost centre. These are the
information from which the simplified direct costing method is starting.

The hotel activity, in its nature, doesnt allow a single cost bearer for its entire activity, specific cost
bearers for every cost centres being necessary.

The simplified direct costing calculation model for the hotel activity is presented in table no 2. The
necessary data, the effective variable expenses for each cost centre, have been taken from the
statements of variable expenses. The variable expenses have been separated on the cost bearers
identified for the hotel activity (accommodation, restaurant and other services). Once this
information is obtained, the next stage is the calculation of the contribution margin (total turnover

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minus total variable expenses) in two steps: contribution margin of production and contribution
margin after sales. This way the contribution of each step to covering the fixed expenses and the
positive or negative effect on profit can be established. Next, the contribution margin of each cost
bearer and of the total hotel activity for the two steps identified is presented:
Table no. 2. Contribution margin calculation according to the simplified direct costing method - lei -
Costs bearers
No. Indicators Other Total
Accommodation Restaurant
services
1. Turnover 3,389,998 1,749,996 433,125 5,573,119
2. Variable production costs 717,423 778,803 144,139 1,640,365
Contribution margin of
3. 2,672,575 971,193 288,986 3,932,754
production (1-2)
4. Variable sales costs 100,144 51,697 12,795 164,636
Contribution margin after sales
5. 2,572,431 919,496 276,191 3,768,118
(3-4)
6. Total fixed expenses 2,300,389
7. Profit 1,467,729

The contribution margin of production, for the analyzed hotel, is very generous being able to cover all
the fixed expenses, therefore placing the hotel in the profitability area. Contribution margin of
production represents 70.57% of total turnover and the fixed expenses represent only 41.28% of total
turnover. If the variable expenses of distribution are taken in account, then the contribution margin
after sales represents 67.61% of total turnover. Therefore, the contribution margin after sales assures
the full coverage of the fixed expenses a surplus of 1,467,729 lei remaining in the form of profit. The
difference between the contribution margin after sales share (67.61%) and the fixed expenses share
(41.28%) of total turnover represents the profit rate of 26.34%. Simplified direct-costing calculation
increases the information value of the contribution margin because it is highlighted in steps and on
cost bearers.
The fixed expenses, in the concept of the simplified direct-costing method, are not directly connected
to the main production activity; therefore, they offer the possibility of consumption evaluation. In
figure no. 2, the relative sizes of fixed expenses of production, administration and sales, are presented.

Fixed expenses structure

Fixed expenses of
sales, 5,05%
Fixed expenses of
administration,
29,45%

Fixed expenses of
production,
65,50%

Figure no. 2 Fixed expenses structure

The above presented figure shows that the fixed expenses of production have a share of 65.50%, the
fixed expenses of administration have a share of 29.45% and the fixed expenses of sales have a share
of 5.05% of the total fixed expenses. Form the calculation obtained with the simplified direct-costing
method, presented in table no. 3, it is easily observed that all the fixed expenses have been covered by
the contribution margin, placing the hotel in the profitability area. In other words, the break-even point
has been exceeded in the analyzed period. When it comes to fixed expenses, it is needed to refer to the
degree of stiffness (Gr) of the organization, which is nothing else than the share of fixed expenses in
total expenses. The formula is shown below [2]:
Chf
Gr x100 , where:
CT
Chf fixed expenses of the organization;
CT total expenses of the organization.

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 Table no. 3. Simplified direct costing calculation
Cost bearers situation
Total
Nr Explanations Accommodation Restaurant Other services
Value % Value % Value % Value %
1 Turnover 3389998 100.00% 1749996 100.00% 433125 100.00% 5573119 100.00%
2 Calculation unit 17115 62984 18615 -
3 Real medium rate 198.07 27.78 23.27 -
4 Variable expenses 817567 24.12% 830500 47.46% 156934 36.23% 1805001 32.39%
5 Calculation unit cost 47.77 13.19 8.43 -
A. Production costs 717423 21.16% 778803 44.50% 144139 33.28% 1640365 29.43%
1. Direct raw materials and consumables, in which: 51856 549382 82118 683356
1.1. Raw materials 0 351359 0 351359
1.2. Merchandise 0 150583 80926 231509
1.3. Fuel for kitchen 0 23892 0 23892
1.4. Direct consumables 27315 15216 0 42531
1.5. Cleaning products 21946 8332 1192 31470
1.6. Other operating supplies 2595 0 0 2595
2. Direct productive personnel salaries and related contributions 18756 9232 2368 30356
3. TESA salaries and related contributions (the variable part) 14871 5195 2346 22412
4. Other variable expenses 60398 916 647 61961
5. Maintenance and functioning of the equipment 332273 147522 50635 530430
5.1. Maintenance and repairs 59962 32188 7730 99880
5.2. Expenses of premises and facilities maintenance 15972 9820 1426 27218
5.3. Expenditure on repairs in common areas 10428 0 0 10428
5.4. Water and energy expenses 171775 89224 22557 283556
5.5. Laundry of sheets 54255 6340 16742 77337
5.6. Laundry of uniforms 4435 9196 2180 15811
5.7. Maintenance and operation of transport means 15446 0 0 15446
5.8. Expenses regarding cracking of kitchen ware 0 754 0 754
6. Overheads of department 239269 66556 6025 311850
6.1. Water and electrical energy consumed in household purpose 26719 18922 4661 50302
6.2. Flowers and decorations 5665 2113 0 7778
6.3. Printing and stationery 17881 8756 1124 27761
6.4. Entertainment and Leisure 21682 34774 0 56456
6.5. Phone and fax 5817 683 240 6740
6.6. Other over 161505 1308 0 162813
I. Contribution margin 2672575 78.84% 971193 55.50% 288986 66.72% 3932754 70.57%
B. Sales variable expenses 100144 2.95% 51697 2.95% 12795 2.95% 164636 2.95%
II. Contribution margin after sales 2572431 75.88% 919496 52.54% 276191 63.77% 3768118 67.61%
C. Fixed expenses: 2300389 41.28%
a. Of production 811956 23.95% 514836 29.42% 179904 41.54% 1506696 27.04%
b. Of sales 116184 2.08%
c. Of administration 677509 12.16%
III. Result 1467729 26.34%

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For the analyzed hotel, the degree of stiffness is:
2,300,389
Gr x100 56 .03 %
4,105,390
The degree of stiffness of 56.03% is absolutely normal, given the field of activity of the organization.
It also shows the extent of the organizations technical and material support.

If the degree of stiffness registers higher values, it highlights the need of stimulating more efficient
usage of the organizations technical and material support for an optimal exploitation of its capacity.
The maximum usage of the technical and material support happens rarely for reasons not entirely
related to the organizations management.

With the simplified direct-costing method, the global analysis is left behind and the passing to a more
detailed analysis is made, an analysis on cost bearers, as far as the method allows. In the effective
calculation (table no. 3) it can be observed that the largest share of the total turnover is obtained by the
accommodation centre, followed by the restaurant centre. Regarding the variable expenses, things
are the same, if we consider the cost bearer share in the total amount of variable expenses. Also, the
analysis shows that the accommodation centre is the most profitable, because the variable expenses
that actually form the production cost represent only 21.16% of the centres turnover, and the
contribution margin represents 78.84% of the centres total sales. This is perfectly normal given that
the accommodation activity is the most important activity of any hotel, providing part of the
dissolution of the other two operational centres.

The information provided by the contribution margin lead to decisions on stimulating the activity of
the hotel accommodation activity. Thus, managers, especially those responsible for marketing and
promotion, are interested to seek creative solutions to promote the hotel accommodation activity for
the following period in order to increase its profitability, or worst case to maintain the current
situation.

However, besides the analysis of variable costs and contribution margin, the relative levels of fixed
costs identified for each cost bearers should be taken into account. So, in table no. 4, we shall submit
the attention to a number of rates, which reveal, from different angles, the production expenses that do
not depend on the volume of activity. We are referring to the fixed expenses identified directly on the
cost bearers.

The degree of stiffness for the other services cost bearer is the highest (55.52%), followed by the
accommodation cost bearer (53.09%) and finally by the restaurant cost bearer with a degree of
stiffness of only 39.80%. The same rate calculated for the production fixed expenses of the entire hotel
has a result of 47.88%, which means that the hotel is well equipped and the facilities are relatively
new.

From the analysis of the fixed expenses rate relative to the contribution margin, this expresses the
relative size of the amount of fixed expenses covered by the contribution margin, and results that the
accommodation cost bearer needs only 30.38% of the contribution margin to cover all of its fixed
expenses. The restaurant cost bearer needs 53.01% of the contribution margin to cover the fixed
expenses and the other services cost bearer needs 62.25% of the contribution margin.
Table no. 4 Fixed expenses rates
Activity
No. Indicators Other Total
Accommodation Restaurant
services
1. Turnover 3,389,998 1,749,996 433,125 5,573,119
2. Contribution margin of production 2,672,575 971,193 288,986 3,932,754
3. Fixed expenses 811,956 514,836 179,904 1,506,696
4. Total production expenses 1,529,379 1,293,639 324,043 3,147,061
5. Degree of stiffness of production (%) 53.09% 39.80% 55.52% 47.88%
6. Fixed expenses rate on the contribution
30.38% 53.01% 62.25% 38.31%
margin (%)
7. Fixed expenses rate on turnover (%) 23.95% 29.42% 41.54% 27.04%

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The third rate is also favorable to the hotel, in total and on cost bearers. It receives an increase of
relevance if analyzed in conjunction with the first two rates calculated and presented in table no. 4.
The rate of fixed costs relative to turnover provides information on how many percent of total turnover
are needed to cover fixed expenses. In this case, the percentage is pretty good, considering that the
amount of fixed costs is approximately equal to the volume of variable costs.

Conclusions
Analyses performed using the simplified direct-costing calculation can be achieved on economic
processes, the total organization or on cost bearers, depending on the possibility of identifying fixed
and variable costs. This version offers a number of indicators that provide information on the
profitability of economic processes, the unit as a whole and the products sold, works performed or
services rendered. If the simplified direct-costing method in chosen for the hotel activity, standards
can be introduced in the analysis in order to give the method added value in terms of predicting future
profitability.

References
[1] Slgean, Liana, (2014), Analiza i modelarea deciziilor economico financiare ale ntreprinderii, Lux
Libris Publishing House, Braov
[2] Clin, O. (coordinator), (2005), Contabilitatea de gestiune i calculaia costurilor, Tribuna Economic
Publishing House, Bucharest

Supplementary recommended readings

Clin, O., Man M., Nedelcu, M.V., (2008), Contabilitate Managerial, Didactic i Pedagogic Publishing
House, Bucharest
Mihalache, A., (2013), Contabilitatea manageriala a unitilor hoteliere, Lux Libris Publishing House, Brasov
Mihalache, A., (2011), Perfecionarea contabilitii de gestiune n activitatea de turism i alimentaie public,
PhD Thesis, ASE Bucharest

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